Cline Shale: Too Early to Say if it's the Oil Industry's 'Next Big Thing'

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Query "Cline Shale" on Google and it won't be long before you find a startling number: 30 billion barrels of potential crude oil. That's twice the estimated resource of the Monterey Shale, three times the size of the Bakken and nearly 10 times the size of the Eagle Ford.

Unfortunately, it's not a real number. It was a hypothetical, best-case scenario floated by an oil company two years ago. But that number has been endlessly repeated on the Internet and social media over the last two years, driving decisions by investors, service providers, economic development organizations and not a few oil & gas companies. Some in the industry are trying to "walk that number back," but their efforts resemble a never-ending game of Whack-A-Mole.

"The 30 billion-barrel number was never meant to be taken seriously or literally," one well-placed industry source told Industrial Info. "In a presentation to Wall Street in 2012, an oil company wanted to dramatize the potential of the Cline Shale if every single thing went right, every variable broke the industry's way, every initiative from the industry was an unvarnished success. But that never happens in the oil business. That number is unproven, potential barrels."

"Unfortunately, a real estate firm heard about the number and started issuing press releases and beating the drum so West Texas could get ready for this huge boom," continued the source, who requested anonymity. "Don't pay any attention to the 30 billion barrel number. It's like believing in Santa Claus."

At about 140 miles long and 70 miles wide, at an average depth of about 9,000 feet and with thickness reportedly between 200 and 500 feet, the Cline Shale is located east and northeast of Midland, Texas, in the Permian Basin. In addition to the Cline Shale, the Permian Basin also is home to several other oil formations thought to be promising, including the Bone Spring, Wolfcamp and Delaware. Not all of these formations are shale plays.

Once thought to be mature, the Permian's crude oil production has grown sharply in recent years through the application of horizontal drilling and hydraulic fracturing. Crude oil production from all parts of the Permian Basin is projected to reach about 1.37 million barrels per day (BBL/d) by 2014, up from about 425,000 BBL/d in 2008, according to the U.S. Energy Information Administration (EIA), the statistical and analytic branch of the U.S. Department of Energy (DoE) (Washington, D.C.).

Oil & Gas producers active in the Cline Shale include Apache Corporation (NYSE:APA) (Houston, Texas), Devon Energy Corporation (NYSE:DVN) (Oklahoma City, Oklahoma), Callon Petroleum Corporation (NYSE:CPE) (Natchez, Mississippi) and Gulfport Energy Corporation (NASDAQ: GPOR) (Oklahoma City).

"We are conducting exploration in the Cline Shale with two rigs," said Chip Minty, Devon's manager of media relations, in an interview. "We are moving methodically to determine the potential for development in the play. It takes time to move through the exploration process because each formation has different characteristics."

"The Cline Shale has been getting a lot of attention recently, and we see it as an area with a lot of potential upside, but we would emphasize that upside has yet to be proven," said Jesus Davis, Industrial Info's vice president of research for the Oil & Gas Production, Pipelines and Terminals industries. "We see development of the Cline as more likely than the Monterey in California. West Texas is a 'pro-oil' region, so we don't see local opposition as an issue for the Cline. And there is a lot of infrastructure in place, though most of the pipelines are already full, so some added infrastructure will be needed. But operators there would be building on an established base and a strong history of oil development.

"In three to five years, there could be significant oil production in the Cline Shale," Davis continued. "I don't know if it will be another Eagle Ford, but it should help boost the production profile of the Permian Basin. People should keep an eye on the cost and availability of water in West Texas, though--that could be a limiting factor in the development of the Cline Shale."

The potential economic impact of continued development of the Permian Basin is being studied by the Institute for Economic Development (IED) at University of Texas at San Antonio (UTSA). Tom Tunstall, research director at the IED, said this forthcoming study, due later this year, will use the same methodology as the group's assessments of the economic impact of the Eagle Ford. For more on the IED's assessment of the Eagle Ford, see July 17, 2013, article - Eagle Ford Counties Reap Huge Reward from Local Oil & Gas Production, but Bumps are in the Road.

"We're hearing a lot about research & development people moving into the area, but not rig operators," Tunstall told Industrial Info. "In terms of public announcements about production, it's been a little quiet. A number of test wells have been drilled, but production data is a little hard to find because the Cline is adjacent to other formations, which raises questions about which formation would get the credit for new oil production."

"As we conduct our research, we have heard that the Cline may be harder and less permeable than the Eagle Ford," Tunstall continued. "Permeability is a non-trivial issue for crude oil production from a shale formation. Also, we are hearing that operators in West Texas are experimenting with hydraulically fracturing vertical wells, which costs far less than hydraulically fracturing horizontal wells."

The UTSA professor estimated that hydraulically fracturing a vertical well in the Cline could cost between $2 million and $4 million, well under the $6 million to $8 million the industry spends to hydraulically fracture a horizontal well in the area. "The cost curve is a function of the learning curve, and every formation is different. The industry is still in the process of figuring out the exact characteristics of the Cline. We really won't know anything for sure until production starts."

Tunstall said counties and trade groups in West Texas are being proactive in preparing for the potential impact of production from the Cline Shale and other formations in the Permian. "In the Bakken and Eagle Ford, cities and counties were caught a little off-guard when production took off. West Texas is trying to get ahead of the curve. There wasn't a lot happening with the Cline two years ago, but now there is. We're seeing 'man camps' being established that didn't exist two years ago. With the oil industry, when production comes online, things tend to happen in a hurry."

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and nine international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.